IBM is in the ethics spotlight over possible violations of bidding provisions with the U.S. Environmental Protection Agency, and the company is temporarily suspended from all Federal contracts.

SAN FRANCISCO, March 31 (Reuters) - IBM (IBM.N: Quote, Profile, Research) is under investigation by the U.S. Environmental Protection Agency over an $80 million bid it made in 2006 to modernize EPA financial systems and has been suspended from seeking new contracts with all U.S. agencies, the company said on Monday.

In addition, IBM said the U.S. Attorney's Office for the Eastern District of Virginia had served IBM and certain employees with grand jury subpoenas requesting testimony and documents on interactions between the EPA and IBM employees.

International Business Machines Corp, the world's largest provider of computer services, said it only learned on Friday of the temporary suspension from the Environmental Protection Agency (EPA) tied to possible violations of ethical bidding provisions on an EPA contract IBM had submitted in March 2006.

IBM shares, which closed up 57 cents at $115.14 in regular New York Stock Exchange trading ahead of the disclosure, lost $1.75, or 1.5 percent, to trade at $113.39 in extended trade.

The temporary suspension applies to all federal agencies and IBM business units. IBM may continue work on existing contracts as of the date of the suspension, unless a particular agency directs otherwise, the company said in a statement.

IBM spokesman Fred McNeese said the company had been blindsided by the government suspension. IBM plans to cooperate in the investigation but will fight to limit the scope of its suspension from bidding on new contracts, he said.

"We are going to cooperate with investigators but we are also going to take all appropriate actions to challenge the scope of this action," McNeese said in a telephone interview.

The company started receiving calls on Friday from outside parties informing it that IBM's name was on a Government Services Administration site listing parties barred from bidding on federal contracts, McNeese said. After inquiries, IBM received a letter of suspension from the EPA, he added.

The spokesman for Armonk, New York-based IBM said the bid covered a financial systems modernization contract that has yet to be awarded. He confirmed that the value of IBM's bid was around $80 million and was for a systemwide EPA project.